A new Federal Communications Commission rule that requires cable operators to change the hardware in their set-top boxes has finally gone into effect, but few industry experts believe it will do much good for consumers or jump-start competition.

As of Sunday, cable operators must provide new TV subscribers with set-top boxes that have a slot for a special PC card known as a CableCard. This card contains decryption mechanisms that determine if a user is allowed to view the video content coming from the cable operator.

In the past this security, which provided conditional access, was integrated into set-top boxes that people leased from their cable operators. But now, due to the new FCC rule, that security mechanism will reside on a separate card that fits into a slot on the set-top box.

So how will consumers be affected? The truth is there is very little benefit to this switch for consumers, some industry experts say. Most people won't even notice if a CableCard has been inserted into their set-top box, because the card itself provides no additional features or functions. What's more, the rule applies only to new set-top boxes.

Some people argue that the change will actually cost consumers money, because cable operators have complained that the changes are costly and anticipate passing along the added expense to subscribers.

"There really aren't any benefits to consumers," said Mike Paxton, an analyst with In-Stat. "It might offer them more choice, but consumers seem happy with what they already have. And it could even raise prices, since the costs associated with the upgrade will likely be passed on to subscribers."

Long time coming
The July 1 deadline has been a long time coming. The Telecommunications Act of 1996 ordered the FCC to help electronics companies compete with devices that cable operators leased to subscribers. The market today is dominated by two major players: Motorola and Cisco Systems' Scientific Atlanta.

The idea was that increased competition would help lower prices and provide more functionality for consumers. But working out the specifications and technical details took a long time. In 2003, the cable industry finally agreed on a decoder, the CableCard. But for the past four years, the cable industry has lobbied the FCC to delay putting the rule into effect.

Some cable operators are still trying to get out of complying with the new requirement. Telephone company Verizon Communications, which offers a TV service through its Fios network, has applied for a waiver, arguing that its technology is new and different enough from the old cable system that it should be granted the waiver. The company is still waiting to hear from the FCC.

"We are optimistic that the FCC will grant our waiver," said David Fish, a spokesman for the company. "Verizon's Fios TV offering is exactly what Congress envisioned when it adopted the waiver provision: new competition to incumbent cable providers and a technologically advanced video offering and technology platform. Verizon's Fios network is transforming the broadband landscape."

"This will help make the set-top box truly portable so it can be installed on any cable operator's network in the country."

--Michael Fidler, CEO, Digeo

Consumer electronic makers have touted the enforcement of the CableCard rule as a breakthrough that could finally help them establish a consumer retail market for alternative set-box devices and other CableCard-enabled devices like TVs and PCs.

For example, a small company called Digeo is planning to release a set-top box in retail stores this fall that will provide an enhanced digital user guide, multi-room digital video recording for high-definition programs, and an integrated DVD player that will allow video streaming into multiple rooms.

The device also will connect directly to the Internet and provide programming from companies that offer content via the Web, such as Joost or Movielink. Digeo hasn't yet announced which providers it will work with, but it will have at least one Internet movie provider signed up when it launches the device this fall, said Michael Fidler, CEO of Digeo.

The company has been selling its products to smaller cable operators like Charter Communications. But it has had a harder time partnering with larger providers like Comcast and Time Warner, because the market is dominated by Motorola and Cisco's Scientific Atlanta.

Fidler said he sees the CableCard requirement as an opportunity for Digeo.

"The enforcement of this rule allows for a very small crack in the door that we can use to get our foot in the market," he said. "This will help make the set-top box truly portable so it can be installed on any cable operator's network in the country."

Fidler said he believes that the only way to drive innovation in the market is to encourage competition. Indeed, this has worked to some degree in the past. When TiVo came to market with its DVR (digital video recorder), which it sold through retail chains, and satellite companies started offering DVR services, cable operators quickly responded by adding DVR functionality to their own set-top boxes.

Consumers have been able to get CableCards for the past few years simply by asking their cable operator for one. TV manufacturers have been putting CableCard slots into high-definition TVs for the last few years. But as of March, only 259,000 CableCards have been installed, according to the National Cable & Telecommunications Association.

The cable industry argues that this is an indication that there is little demand for CableCard-enabled devices.

"We're supportive of a retail marketplace," said Brian Dietz, a spokesman for the NCTA. "We've made CableCards available. But so far there seems to be little desire on the side of consumers to enable the technology."

In-Stat's Paxton said it will be difficult to create a consumer market for advanced set-top boxes. For one, American consumers like the device-subscription model.

TiVo, which essentially invented the DVR category, has never gained significant market share through its retail strategy. The company has shifted gears in recent years to license its technology to cable operators like Comcast. Satellite TV providers, which used to require subscribers to purchase their own set-top boxes, are now starting to offer their own leasing plans.

"I'm sure there will be some die-hard tech geeks who might be interested in buying their own set-top box. But will those 5,000 or 10,000 customers be enough to make a difference?"

--Mike Paxton, analyst, In-Stat

"Consumers don't seem to want the competition in the set-top market," Paxton said. "They are perfectly happy to lease a box from their cable provider for $5 or $10 a month."

One of the main reasons for this is that leasing a box offers little risk to the consumer, he said. If the box breaks or an upgrade is available, subscribers can just swap one box for another. And, he added, it's actually cheaper to lease a set-top box over the long term than to buy one.

The situation is no better for TV manufacturers, which have been putting CableCard slots in high-end televisions for several years. While consumers using a CableCard-enabled TV won't need a set-top box, the cost of these televisions is considerably more expensive than TVs that don't use cable cards and connect to a regular set-top box.

The other major issue is that the current version of CableCard technology does not allow for two-way communication between the device and the cable network. This means that interactive services like video-on-demand and pay-per-view can't be enabled through a CableCard slot on a TV or a set-top box bought at a retail store.

This is a major issue for companies like Digeo that want to sell their devices to high-end cable subscribers. Video-on-demand is one of the fastest-growing services that cable operators offer. At the end of the first quarter of 2007, roughly 30 million homes used video-on-demand, according to market research firm SNL Kagan. Operator Comcast said that roughly 75 percent of subscribers that could get VOD used the service.

"Without two-way functionality that works, it negates some of the advancements that new set-top box makers can offer consumers," said Ian Olgeirson, senior analyst at SNL Kagan. "They could deliver over-the-top content via the Internet, but I think that market is still a long way off."

A new specification called OCAP, or Open Cable Application Platform, should help. Cable operators and consumer electronics companies are working together to develop an acceptable standard. But that has proven difficult, given the fact that cable operators don't want to give up control of the consumer experience.

But companies like Digeo say that allowing cable operators to dictate what type of interface the consumer sees impedes on their ability to innovate and offer a differentiated experience for subscribers.

At the end of the day, industry experts say that the CableCard revolution and a commercial set-top box market have a tough road ahead.

"I'm sure there will be some die-hard tech geeks who might be interested in buying their own set-top box," Paxton said. "But will those 5,000 or 10,000 customers be enough to make a difference? I don't know. But at least this new rule will give companies like Digeo a distribution channel they didn't really have before."